RECOMMENDATIONS MADE IN CONFERENCE HELD MAY 10-13, 1942,
ON THE SUBJECT OF THE PROPER FORM OF A
FEDERAL RETAIL SALES TAX AS SUBSEQUENTLY REVISED

Present: Messrs. Martin, Farioletti, Wahrhaftig, Pools,
and Due

SUMMARY OF RECOMMENDATIONS

1. New collection methods, rather than the use of
present methods used for other taxes, are essential if a
Federal retail sales tax is to be successful.

2. The law must allow for flexibility of
administration.

3. The tax shall be a privilege tax on retailers
rather than a tax on consumers.

4. The tax shall apply to all sales of tangible
personal property except sales for resale, including
sales of materials and parts which become physical
ingredients of other articles, and except sales of
nonreturnable containers, feed, seed, and fertilizer,
sales of fuel, and sales of industrial, commercial, and
agricultural machinery.

5. Services usually rendered in conjunction with sale
of taxable tangible personal property, including repair
and fabrication of taxable tangible personal property,
rental of taxable tangible personal property, laundry and
dry cleaning, and services of barber shops and beauty
parlors shall be subject to the tax.

6. All sales to the governments shall be taxed, and
all sales by governments which are essentially commercial
sales.

7. There shall be no exemptions of specific
commodities or of specific groups of purchasers. Sales of
nonreturnable containers, feed, seed, and fertilizer,
fuel, and commercial, industrial, and agricultural
machinery shall be excluded from retail sales.

8. Sales of nonprofit organizations shall be exempt
only if the organizations are charitable or educational,
and strictly nonprofit, and the sales are incident to the
rendering of charity or education. Such exempt sales
shall include sales of meals and publications by schools
of less than collegiate grade and student organizations
and parent-teacher associations of such schools.

9. Casual sales shall be exempted.

10. Gross sales, less deduction for returns and for
separately quoted delivery and finance charges, and for
other taxes on the sale of goods paid by the retailer in
his own or the consumer's behalf, shall be the measure of
the tax. No other deductions should be allowable.

11. It is essential that the rate shall be uniform to
avoid extreme administrative difficulties.

12. No outright mandatory shifting provision should be
included, but rather a general statement to the effect
that the retailer is expected to collect the tax from the
consumer and to quote the tax separately when feasible.

13. A definite provision to allow agreements with the
States for cooperation and some joint administration is
desirable.

14. Permanent revokable [sic] nontransferable permits,
for which a nominal fee would be charged, should be
required for each business establishment, including each
unit of a chain system.

15. Returns should be required on a quarterly basis.
The administrator should have power to require bond where
found desirable.

FEDERAL RETAIL SALES TAX

I. General Principles

A. The tax shall be imposed as a privilege tax on
retailers rather than as a tax on consumers, in order to

1. Prevent exemption of sales to certain groups of
consumers for constitutional or political reasons. If the
tax is imposed on consumers, sales to States would
necessarily be constitutionally exempt, and sales to
charitable organizations probably would have to be
exempted for political reasons.

2. Place definite liability for payment of tax on the
retailer.

3. Prevent deduction of the sales tax by consumers
from income for income tax purposes. To allow this
deduction would reduce Government revenue, and in part
make the tax more regressive, since very low income
groups would not benefit from income tax deductions and
greatest gain would go to those in high income levels.

B. It is essential that entirely new methods of
collection be developed, along the lines of those used by
such States as California, that have led in sales tax
administration, rather than to follow the methods used by
the Bureau of Internal Revenue for existing taxes. The
present methods are not adequate for a tax of the nature
of a retail sales tax.

C. It is essential that the legal structure allow for
flexibility of administration, especially for the purpose
of promotion of cooperation with taxpayers.

II. Scope

A. DEFINITION OF TANGIBLE PERSONAL PROPERTY: It is
essential to define tangible personal property in such a
way as to

3. Insure uniform construction throughout the country,
despite differences in State laws as to definition of
real property. Even within States, in some cases certain
types of property are held to be real for certain
purposes and personal for others. Uniform construction is
essential:

a. To prevent differences in tax liability for Federal
sales tax in different States.

b. To avoid claims that these differences violate the
"equal protection" concept.

B. DEFINITION OF A SALE

1. It is essential to distinguish carefully between
sale and service.

2. Gifts must be distinguished carefully from sales,
to prevent avoidance.

3. It is recommended that sales shall be defined to
include:

a. Transfer of title by exchange, or barter.

b. Installment and conditional sales, whether or not
title passes, provided possession passes.

c. Leases and rentals, licenses to use, consume, or
reproduce.

d. Leases of patent rights or of right to use patent
rights, to the extent that it is necessary to include
these to prevent evasion of the tax on leases of goods.
It is not intended to tax legitimate leases of patent
rights where no avoidance of the law is intended.

e. Withdrawal from stock for use by the firm of goods
purchased for resale; in regard to these it is
recommended that --

i. Readjustments be made on an inventory basis, rather
than application of the tax entirely on the basis of
original intent at time of purchase.

ii. The tax measure shall be the selling price of the
goods rather than the purchase price.

Note: In the case of goods bought for a firm's own use
and subsequently resold, no valuation problem is
involved; readjustments shall be made on a refund basis.

f. Use by a firm of goods which it has produced, there
being no sale transaction involved. The Administrator
shall be given power to determine fair market value in
these cases.

C. DEFINITION OF PERSON: PERSON shall be defined to
include

1. individuals

2. copartnerships

3. corporations

4. associations

5. firms

6. joint ventures (such as railroad tariff bureaus)

7. co-operatives

8. estates

9. trusts

10. business trusts

11. syndicates

12. receivers

13. social clubs

14. fraternal organizations

15. those having possession, not ownership, of
tangible personal property for sale, including:

a. consignees

b. auctioneers

c. brokers

d. lienors

16. United States 17. States and their political
subdivisions

18. Indians -- tribal or otherwise

19. leased departments

20. peddlers, canvassers, etc.

21. florists operating under telegraphic delivery
service

22. any other group or combination acting as a unit

D. DEFINITION OF RETAIL SALE

1. This definition is of primary importance, since the
nature of the definition determines whether or not sales
of producers' goods are taxable. In making the decision
in regard to this problem, it is considered necessary to
regard the Federal retail sales tax as a temporary war
measure. Accordingly considerations of revenue and
administration must take precedence over other economic
considerations which should play a more significant part
were the tax to be regarded as a permanent measure. On
this basis it would be recommended that retail sales be
defined to include all sales other than those made for
resale, including sales of second hand goods. Thus sales
of producers' goods would be taxed. By following this
method, the serious administrative difficulties involved
in any system which requires retailers to keep their
records in such a way as to show different types of sales
are avoided, as well as departure from State practice. A
departure of this type would lessen cooperation of the
State tax administrations and lead to confusion and
expense for the taxpayers, especially in regard to
records and returns. However, it must not be forgotten
that this method may destroy in part or entirely the
anti-inflationary effect of the sales tax and may create
extremely serious administrative problems for OPA and
WPB. Therefore, before making a final recommendation, it
is suggested that the Treasury contact these agencies to
get their attitude toward the effect of a sales tax of
the nature indicated above on the problem of price
control and to discover whether or not they have done any
work which might throw light on the significance of a tax
on producers' goods on the prices of the finished
products and on the inflationary effect of such a sales
tax.

SUBSEQUENT REVISION:

As a result of further study of the problem and
contacts with OPA and WPB officials, it was finally
concluded that all sales of fuel, and sales of
commercial, industrial, and agricultural machinery should
be excluded from the tax. These exclusions would
eliminate from the tax a large part of the more important
articles entering into business costs, and greatly reduce
the pressure that would be placed on price ceilings by
the tax. Administrative efficiency will be reduced
somewhat, but the exclusion does not appear to be
unworkable. This change will make the Federal tax
proposal similar in respect to taxation of capital
equipment sales to the Ohio-Michigan type of sales tax
discussed below. Experience of these State with exclusion
of machinery has indicated, that this type of exemption
can be administered, although it does give rise to some
difficulties and a certain amount of evasion.

The term MACHINERY would be defined so as to include
such articles as railroad freight care and truck trailers
not generally considered to be machinery. The exemption
would be limited to those types of machinery used
primarily for industrial, commercial, and agricultural
purposes. Sales of the articles excluded would not be
taxed regardless of the nature of the purchaser in
particular cases. Machinery not falling within one of
these categories would be taxable even when purchased by
business firms.

The fuel exclusion would apply to all sales of fuel,
regardless of the nature of the purchaser. Any attempt to
differentiate between sales of fuel for production
purposes and those for consumption purposes would raise
serious problems. It would be difficult, if not
impossible, to get dealers to determine properly the use
at time of sale, and evasion would be inevitable.

2. Assuming that retail sales are defined as indicated
above, it is recommended that the component part
(physical ingredient) rule be used as a means of
delimiting sales for resale. The component-part rule
should be modified by the factor of purpose; that is, a
good should be considered as becoming a part of a
finished product only if it is used in processing with
the intent that it shall become a part of the finished
product. There are certain closely related problems:

a. By definition if possible, and otherwise by
out-right exemption, feed, seed, and fertilizer should be
excluded from the scope of the tax. Following the
component-part rule, and State procedure, it would be
desirable in any event to excluded these items to the
extent to which they are used in the production of goods
for sale. It is not administratively feasible to tax
these goods when sold for use by a farmer in production
of goods for his own consumption, and, therefore, they
should be uniformly excluded regardless of the purpose
for which they are to be used.

b. By definition if possible, otherwise by specific
exemption, all containers, including wrapping materials,
should be exempted. Most would be exempted anyway under
the resale concept and unnecessary administrative
difficulties are created by trying to tax the few sales
of containers not made for resale.

3. Consideration has been given to two alternate
plans, one in which only sales to final consumers would
be taxed, excluding from the scope all sales of goods for
business uses, and another, comparable to the systems
used by Ohio and Michigan, in which certain specified
groups of producers' goods are exempted. The first type
is by far the most satisfactory from the standpoint of
economic considerations, since it alone avoids imposition
of the tax at earlier levels in the production process
and thus prevents pyramiding, aids in lessening
inflationary tendencies, avoids discrimination between
new and old firms and insures that the amount of tax
borne by the consumers is the same per dollar of sales
price on all goods. This method also has the
administrative advantages of lessening difficulties
created by the tax for price control by O.P.A. and W.P.B.
and of avoiding the use of the component-part rule, which
is extremely arbitrary and creates many problems of
interpretation. Despite these advantages, the plan was
considered inadvisable under present considerations (1)
because of the difficulties involved in getting retailers
to keep records to show taxable and non-taxable sales and
to determine the intended use of goods, and (2) because
of the need to maintain State and taxpayer cooperation.
The Michigan- Ohio system does eliminate some producers'
goods from the scope of the tax, but does not eliminate
all, nor avoid the need for use of the component-part
rule. Likewise under this method, sellers must keep
records to show volume of sales of different types of
goods, and many problems must arise as to whether or not
certain goods belong in taxable or exempt classes.
Experiences of those States which have used this method
have not been satisfactory.

E. Taxation of service

1. Electricity, gas, and water

The structure of a retail sales tax is inconsistent
with a service tax on utilities in that:

a. For the latter it is desirable to elide State rate
regulation.

b. In order to subject municipally owned public
utilities to the tax, it is preferable to impose the tax
directly on the consumers of the service rather than on
the municipalities.

It is therefore desirable to separate the problem from
the retail sales tax issue. It does not seem advisable to
recommend a separate consumers' tax on these utility
services at present because of the difficulty in
distinguishing between final use of the services by
consumers and use in further production. The utility
companies would be put to very considerable expense were
the obligation of making the separation placed on them.
It is not considered desirable to tax all sales of these
utility services because of the importance of them as
cost items in certain industries. Question was raised of
the desirability of taxing sales of coal and fuel oil to
business enterprises when electricity and gas are not
taxed. It does not seem advisable however to recommend
exemption of coal and oil sales. The solution would seem
to be the revision of the excise taxes on utility
services.

2. Telephone, telegraph, and transportation

These services should be excluded from the tax because
of the more adequate treatment provided them by existing
excises. Tolls should be excluded because of the
difficulty of collecting from many small enterprises, and
the fact that many tolls enter into cost of production.

The objection indicated above against exempting
certain tangible personal property because of existing
excises on the goods does not apply to exemption of
utility services for the same reason, since no difficulty
exists in regard to distinguishing sales of utility
services from taxable sales made by the same enterprises.

3. Services sold in connection with taxable tangible
personal property; repairs and fabrication.

Services sold with taxable tangible personal property
should be taxable, whether or not separately quoted from
the sale price of the article.

Repairs and fabrication are to be included in the tax,
although it is recognized that large numbers of casual
sales cannot be reached. Since repairs are included, so
also are installation charges. Since most of those
engaged in the repair of tangible personal property make
sales incidental to the service, they are in any case
subject to the sales tax; consequently their inclusion
will not add tremendously to the number of taxpayers.

Repairs and installations to REAL property are not
included because of great administrative difficulties
involved in tracking them down. Furthermore, those who
provide these services do not usually sell tangible goods
in addition to providing the service. The procedure
should be to tax the goods sold to these individuals.

These should be included in the sales tax. They
involve fairly large amounts of revenue; the number of
small enterprises in these fields is substantial, but
most already sell taxable goods.

5. Supply services

Supply services (towels, costumes, etc.) are to be
included in the tax.

6. Rental of space

In general rental of space is excluded on the grounds
of expense of collection, because of difficulty in
locating. Parking lots should be taxed under a special
excise.

7. Federal services exclusive of domestic service

Considerable doubt existed as to whether barber shops
and beauty parlors, and other personal non-domestic
non-professional services ought to be included. The
conclusion was to tax them, because of the revenue
required, despite the administrative cost of handling
large numbers of taxpayers.

8. Personal servants

These are to be excluded from the tax.

9. The following services are omitted: professional,
hospital, education, banks, insurance, housing. Hotels
are also excluded because of the difficulty of separating
transient from permanent residents, business from
pleasure, and certain kinds of hotels from certain kinds
of apartments.

10. Recreation

This is excluded as a class because most of the
individual items in this class are already subject to the
excise. Those which are not can better be handled under
the excise than under the sales tax.

III. Specific exemptions

A. Sales to and by governments:

1. Sales to governments, State and Federal, and to
contractor on government projects: It is recommended that
all such sales be taxed. This method is necessary to
avoid the administrative difficulties involved when
sellers must distinguish in their records and returns
between sales to different types of buyers. It is
believed that this problem is more serious than that
involved in collection of tax revenue with one hand and
payment of that amount out in his purchase price of goods
bought with the other.

2. Sales by Governments: Those sales which are
essentially commercial sales should be taxable; others
should not be. The law must be worded to include, as far
as the Federal Government is concerned, those sales which
are in practice commercial sales, even though considered
otherwise by the courts. This procedure is necessary to
avoid unfair competition with private enterprise.

Note: In regard to sales to Government, if political
considerations force exclusion of these, the levels to
which exemption could be extended are:
1. Sales to States and local Governments only
2. Sales to all Governments
3. Sales to Governments and to cost-plus-fixed-fee contractors
4. Sales to Governments and to all government contractors

B. Exports and sales to foreign government
representatives:

Exemption of these shall be controlled by
constitutional considerations.

C. Articles already subject to excises:

These shall not be exempt from the retail sales tax.
To exempt such goods creates serious administrative
difficulties in that it is impossible to force retailers
to distinguish in their records the volume of sales of
different commodities. If any adjustment is necessary it
shall be made in the excises.

D. Exemption of necessities:

There shall be no exemption of foods, clothing, or
other necessities. To attempt to lessen regressiveness by
this means creates extreme administrative difficulties in
that retailers cannot be made to keep records in such a
way as to distinguish between sales of different types of
goods. The most that might be done would be to exempt
sales of goods under the food stamp plan of the Surplus
Marketing Administration. This is not recommended,
however.

E. Non-profit organizations:

1. Sales to non-profit organizations shall not be
exempted.

2. Sales by non-profit organizations shall be exempted
only when

a. The organizations are charitable or educational in
character.

b. The organizations meet the requirements of the
Federal income tax law as to non-profit.

c. The sales are incident to the provision of charity
or education.

Such exempt sales shall include sales of meals and
publications of schools of less than collegiate grade and
student organizations and parent-teacher associations of
such schools. From an administrative standpoint, it is
easier to exempt such sales than to attempt to tax them.

Such sales should be excluded by definition if
possible rather than outright exemption.

F. Casual sales and sales of small enterprises.

1. Casual sales by those other than business
enterprises shall be exempt.

2. There shall be no exemption for small enterprises.

SUBSEQUENT ADDITION

G. Fuel, and commercial, industrial, and agricultural
machinery

As indicated above, it is necessary in the interest of
efficient operation of the price-control system to
exclude from the tax sales of fuel, and sales of
commercial, industrial, and agricultural machinery. Sales
of these articles should be excluded from retail sales
rather than being exempted outright. One unfortunate
effect of providing any exemptions is the precedent
offered for further exemptions. To the extent that
granting of exemptions can be made less obvious by use of
other terminology, the danger of granting precedent can
be lessened. Essentially exclusion of sales of fuel and
machinery does not involve exemption in the usual sense
of the term but rather readjustment of retail sales in
such a way as to make the tax a single-stage tax so far
as possible.

IV. Measure of the tax

A. The basis of the measure of the tax should be gross
sales rather than gross receipts, but some readjustments
as indicated below are necessary. The basic reason is to
insure collection of tax on credit transactions at the
time the sales are made, to avoid subsequent difficulties
of collection.

B. Gross sales shall include the total sale, lease, or
rental price, whether paid in cash, credit, property, or
services.

1. No deductions shall be made for the value of
trade-ins; when only the net price is quoted, the value
of trade-ins shall be added.

2. Installation charges shall be included.

3. Delivery charges shall not be included if quoted
separately.

4. Interest, insurance, finance, investigation, and
similar charges shall not be included if quoted
separately.

7. All sales taxes (Federal, State, and local) paid to
the Government by the retailer in his own behalf as a
retailer or on the behalf of the consumer shall be
deductible.

C. No allowance shall be made to the seller for his
work in collection of the tax.

D. Deductions shall be allowed for returned goods, but
not for bad debts or repossessions.

E. Amounts paid for options shall be taxed whether the
options are exercised or not. This is necessary to
prevent avoidance.

F. The Commissioner shall have power to set the price
for tax purposes whenever it appears that the sale has
not been at arm's length or for any other reason the
price is not a legitimate sale price, or when there is no
sale price at all.

V. Tax Rate

A. It is recommended that the rate be uniform. Any
system of differentiated rates creates an almost
impossible administrative problem since there is no way
of getting the retailers to keep records which will show
sales in each rate group.

VI. Shifting of the tax

A. There should be included a provision that retailers
may not advertise that they are absorbing the tax.

B. There shall be a statement to the effect that the
retailers are expected to reimburse themselves for the
tax from the consumers whenever feasible, and to quote
the tax separately from the selling price of the article
whenever it is feasible. The provision should be similar
to the provision in the California law. There should be
no actual mandatory shifting provisions.

C. The Commissioner should be allowed the authority to
issue schedules for collection if found desirable. No
provision for this is necessary or desirable in the law.

VII. State-Federal cooperation

The Commissioner should be given express power to
enter into agreements with the States individually to
provide for as much cooperation and joint use of
personnel, equipment, and lists, etc., as may prove
possible.

VIII. Administrative provisions

A. Permits

It is recommended that each person (individual,
partnership, corporation, etc.,) upon whom a tax is
imposed be required to obtain a permit. This requirement
serves the purpose of furnishing the administrator the
names and addresses of taxpayers and power to revoke the
permit is an extremely effective collection procedure.
Since permits are not required for the purpose of raising
revenue, it is suggested that the permits be issued for
an indefinite period, rather than on an annual basis and
that a fee of not exceeding $1.00 be charged for a
permit. The permit should be non-transferable in order
that the administrator will be advised of all changes of
ownership and valid only for the transaction of business
at the place designated thereon, in order that he will be
advised of changes of business locations. A separate
permit for each place of business operated by a firm
having two or more branches appears advisable as a means
of avoiding confusion when the branches file separate
returns. The fact that a permit is required for each
separate place of business would not, however, preclude
the use of consolidated returns covering the several
branches of a firm when it desires to report on that
basis.

B. Returns

It is recommended that the basis reporting period be a
calendar quarter, quarterly reporting having an advantage
over monthly reporting in that it is not necessary to
require reports as often as monthly from a collection
standpoint for a large proportion of the taxpayers and
the administrator will have an opportunity to prepare a
delinquency list for one reporting period before reports
for the next succeeding period are due. The administrator
should, however, be given a discretionary power to
require returns either more frequently or less frequently
than quarterly whenever necessary to facilitate or
simplify the collection of the tax. The returns should be
accompanied by a remittance of the amount of tax shown
thereon to be due.

C. Limitation periods

As a matter of fairness to taxpayers, it is strongly
recommended that a limitation period of the same duration
be set forth for the granting of refunds as is set forth
for the levying of assessments of tax.

D. Security to insure payment of tax

It is recommended that the administrator be authorised
to require the deposit of security (generally in the form
of a surety bond or cash deposit) to insure the payment
of tax. The grant of authority should be worded in such a
way as to permit him to require security of particular
taxpayers or particular classes of taxpayers whose
financial condition may be questioned. The security
requirement is advisable not only from the standpoint of
enforcing payment of the tax but also from the standpoint
of minimizing the number of cases in which a retailer
will be able to divert to his own purposes funds
collected from his customers as tax reimbursement and
thereby in a moral though not in a legal sense defraud
his customers and the Government.